Let's say I'm hedging front month VIX with the next contract. What's the ratio, and what's the carry? It's based on vega or what?
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IMHO: You MAY have something interesting in mind but best to consider the different Futures to be different Futures! -- sounds odd and expect you should get no slack from brokers (due the terms to relate to different products). A time spread on VIX options would be interesting, but think we may be left with less options (pardon the pun) to use. Either you may be barking up the wrong tree, or I am missing a deeper understanding of your interest. {Front month avail thru Tuesday only next week.} --- However, I do wish time spreads would be permitted as orders on VIX options as well.
Co-Pilot When hedging one VIX futures contract with another (e.g., front month versus next month), you generally need to account for two different aspects: Hedge Ratio (Exposure Matching): Since the sensitivity of a futures contract to changes in volatility—its “vega” (or more generally, its responsiveness to changes in the underlying variable)—depends on the time to expiration, the front‐month VIX future will typically have a different vega than the next contract. To hedge the front month using the next contract, you usually scale your position by the ratio of the front‐month’s vega to the next contract’s vega. For instance, if the front month exhibits a vega of 0.95 and the next month’s contract a vega of 0.75 (numbers used for illustrative purposes), the hedge ratio would be: Hedge Ratio = 0.95 / 0.75 ≈ 1.27 This means that—in terms of volatility sensitivity—you’d need about 1.27 contracts of the next month to offset one contract of the front month. In essence, yes, the ratio is driven by the differences in “vega” (or overall sensitivity) between the two expirations. Carry (Roll Yield): The “carry” here refers to the cost (or benefit) of rolling from the front month to the next contract and is determined by the term structure of VIX futures. It’s not based on vega but rather on the price differential between the two contracts. In a contango situation (where later-dated futures are priced higher than the front month), rolling the position generates a negative roll yield (a cost). Conversely, in backwardation you might capture positive roll yield. You can approximate the carry as: Carry ≈ (Front Month Price − Next Month Price) ÷ Time to Expiration (annualized if needed) For example, if the front month is trading at 18 and the next month at 20 with 30 days remaining, the simple daily roll yield is (18 – 20) divided by 30, which when annualized (multiplying by 365) gives you an approximate annual rate. The exact number depends on current market conditions and the specifics of how many days remain in the contract. Summary: Hedge Ratio: Typically set by the ratio of the front month vega to the next contract’s vega. Carry: Determined by the price difference between the front and next contracts (reflecting contango or backwardation), not by vega. Keep in mind that VIX futures dynamics are quite nuanced, and the contracts can exhibit non-linear behaviors especially in turbulent markets. Models and real-time market data are essential to get precise numbers when setting up such hedges.
I want to compare two structures. Let's say I sell two ATM puts and buy an ATM call and 2x 25 delta calls. How does this position differ from the ATM forward. Naively, I am altering the gamma of the risk (market has to move more to get my deltas to match my short put delta?).
Ask chatGPT maybe … Looks like the ATM forward has zero gamma & vega while the 2x25 delta adds exposure to these. Would be interesting to chart it ? Or here.
What asset are we talking about? Once break it down, you have a ratio spread - depending on the level of vol and skew you might be short or long gamma at inception